Tuesday, March 31, 2015

Michael Porter's Competitive Forces in Place in the Pittsburgh Grocer Market.

                Growing up in Western Pennsylvania in the 1980-1990s, grocery shopping was a two-party system: there was Giant Eagle and there was Shop ‘n’ Save.[i] Furthermore, the concept of “health food stores” was an idea that had already arrived and died away in the form of small, often inconveniently located, and overpriced specialized markets – an economically failed concept. Which makes today’s grocery landscape all the more surprising. After decades of status quo, the grocery marketplace in the Pittsburgh area has suddenly shifted dramatically and in very short order, with the eruption of specialized health food stores (Whole Foods), moderately-priced and ingredient-conscious stores (Trader Joe’s), and low-priced and moderately ingredient-conscious stores (ALDI), as well as others falling within this spectrum (the Fresh Market, Wal-Mart Supercenters). I believe this market shift is an apt illustration of “The Five Competitive Forces that Shape Strategy” as described by Michael Porter. I will detail a couple of these below.
                Threat of Entry. For decades, the threat of entry to the grocery market in the Pittsburgh area was unwaveringly low. While the cost of opening a grocery store is relatively low, the cost of stocking a store’s worth of shelves with typically quick-perishing goods is high. Furthermore, the grocery consumer of the 1980-2000s appears to have valued price and familiarity above other factors – a notion supported by the unsuccessful health food store markets. This created a bipolar market wherein Giant Eagle and Shop ‘n’ Save sold primarily identical goods and competed with each other based primarily on price and location. The 2000s have produced a new breed of shopper: social media-educated on the controversial dealings of the American food market, savvy and suddenly valuing quality over convenience. The old guard grocery stores were seemingly slow to react to this shift in demand, which created a new market waiting to be filled by the emerging grocery chains.
                Power of Suppliers. As described above, the demand of savvy, health-concerned consumers created a new market need. But also as described above, this market had existed in forms in the past, but stores had been unable to fill it. What was going to make this new breed of grocery store succeed where others had failed before? The answer has come in the form of controlled costs. Trader Joe’s and ALDI, for example, stock their shelves with their own private labels (Trader Joe’s and Millvale, respectively). The stores accomplish this through selective partnerships with food manufacturers, which allow the stores to sell products that meet their quality guidelines, and to do so at a reduced price by skipping the middlemen of retail supply. Additionally, this new wave of grocery chains conduct significantly less marketing, which has long been a prevalent staple (and expense) of Giant Eagle and Shop ‘n’ Save. This commercial-less business model serves two purposes: appealing to their savvy consumer base who appear put-off by rampant advertising (fast food luminary Chipotle has also adopted this no-commercial strategy in an extremely commercialized market), and translating low marketing costs to affordable food prices.
                In his article “The Five Competitive Forces that Shape Strategy,” Michael Porter details the driving forces behind the shifts that occur in the economic marketplace. In the changes of the local grocer market, one can clearly see these principles in action.

[i] Yes, there were always fringe options, too – Foodland, the development of food items being carried in retail good shops – but for the brevity’s sake, we’ll stick with these two.

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